Match INvestments to Your Time Horizon

Before buying your first share of Apple, Disney, or Facebook, ask yourself: can you afford to invest?

Sure, you may have money available today, but if you plan to buy an ownership stake in a business, it is more important to determine if you can allow that money to be invested for the next five years.

The key to investing responsibly is budgeting. During my days as an economics major, I learned investing is today's consumption forgone for the purpose of future consumption. In English, earmark the money you invest for future purchases (retirement, higher education, vacation).

Money needed within 12 months should probably never leave your bank account. Unless you can wait five years, avoid equity investments all together.

Match investments to your temperament 

Ask yourself: could I survive a day in which my shares depreciate 50%? If not, do not buy a stake in a early-stage biotech company. 

We buy shares of companies we believe to be undervalued by the market. Profits are realized when the market corrects the error of its valuation. When you correctly identify mispriced securities, you still need to survive long enough for the market corrects its mistakes. 

Even an professional gambler, with nerves of steel, may be proned to investing errors due to inherent cognitive biases. To err is human. Study Daniel Kahnemann's work on decision theory to better understand the challenges our survival-focused brains pose to sound investment decisions.